When Singapore Airlines CEO Chew Choon Seng told an AP reporter on the first commercial A380 flight to Sydney last week that Tiger Airways would be going public at some stage, I almost choked on a fur ball: A budget carrier going public sounds wacky. Afterall, budget carriers are low-margin operations by definition. Bring down the value provided to passengers so you can bring down the price. Just like banks which face so-called "margin compression" when interest rates are low, budget carriers have to operate in an industry which is not designed to generate huge profit. But I think there is more to it than that.

Chew's comments were as follows:

Chew also said Tiger Airways, in which the Irish founders of Ryanair hold a stake, will eventually sell shares to the public.
"The plan for Tiger is to eventually go to the market. It will go to the market when conditions are right," he said.

Clearly, budget carriers can be profitable. But cast your mind back to all the discussion about budget carriers when they first came about a few years ago. There was a lot of talk of quick attrition (which is exactly what happened to ValuAir), as they struggled to make money on small fares. They were seen as a necessary evil, as market-disrupting operators like AirAsia came onto the scene, which were going to eat away at the profits of the full-service carriers.

But what has actually happened? Singapore Airlines is more profitable than ever, and while clearly the airline industry has gone through tough times I don't hear about another Delta or United going to the wall. On the contrary! (Story continued below poll)


What this leads to is two possibilities:

1. Budget carriers are making slim margins, and the only reason the current owners would want to list them is to sell-away low-return investments, or
2. Budget carriers actually do very well, offering special fares long in advance and keeping fares which are close to the full-service carriers for near-term bookings.

Chew's further comment is telling:

"Our Irish partners in Tiger are not exactly pressing for an IPO (initial public offering)."

In other words, Tiger is actually earning a fabulous return. A wolf in budget clothing.

But Chew's final comment is perplexing:

"They want to go to the market when conditions are optimal and it's not right now."

I see.

So the STI at or near records is not optimal?

Then when?!?!

Oil prices are above US$90 a barrel, sure, but they're unlikely to fall far, even if they do come down.

So again, if not now, when?


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Mark Laudi

Labels: budget carrier, public listing, Singapore Exchange, Tiger Airways